Companies may choose to have a periodic or a perpetual system for their inventory replenishment. A periodic system is where a company purchases all inventories required for the year and feeds its production department or retail out lets from there in. A perpetual system is where in raw materials are bought as and when the company feels the need to do so and in my experience so far, I have not come across any company that operates on a periodic inventory system, perpetual is the preferred system so much so that a relatively newer technique, the JIT (just in time) is being practiced by many companies, big and small.
Inventory Replenishment is predominantly based on historical to determine inventory requirements; this in turn is equally applicable to one stand alone site or multiple sites across the locality, country and even the globe.
Impact of under-stocking
Inventories are essentially the lifeblood of a business therefore, it is imperative that inventory is available when required unless circumstances adversely affect the availability or that the materials have to be ordered to specific specifications; otherwise, customers often will not tolerate product unavailability and/or delays in delivery beyond a stipulated time. In some cases, a shortage may be only a small inconvenience (such as wanting a particular flavor of ice cream), while sometimes it may cause a severe problem (such as interrupting production-line activity at a factory that manufactures customized luxury yachts). On top of that periodic shortages can be expected, but then these recurrent shortages may in due course eat into a company’s reputation and condense their market share.
Impact of over-stocking
Likewise, overabundant, slow-moving inventories can place a serious strain on a company’s resources and negatively affect the company’s ability to take advantage of other business opportunities.
Frequent shortages or excessive inventories are telltale signs of a company headed in the wrong direction moreover, many businesses have the misconception that high levels of customer service can be provided by keeping an abundant supply of products on hand to meet expected demand. However, keeping excess product on hand is very expensive, resulting in eventually write-offs.
When ordering, holding, and stock-out costs are all known, Replenishment Planning can be used to calculate optimal inventory replenishment. However, estimating stock-out costs can be difficult.
Forecast demand
Track usage and vendor performance statistics to forecast demand.
Coordinate stock availability
Calculate optimal order points, safety stock, and order quantities automatically so the right amount of the desired materials are available at the right time.
Optimize calculations
Eliminate reorder guesswork by calculating past inventory turnovers and allowing for sales hikes/movements based on seasonal/cyclic trends or unusual demands. Maintain optimal stock levels, reduce inventory carrying costs, and help eliminate special or urgent reorder charges.
Automate the replenishment cycle
Save time and money by reducing the expense of last minute reorders and lost sales opportunities when stock is unavailable. With Microsoft Dynamics SL Inventory Replenishment you can automatically generate purchase orders.
Meet product needs
Satisfy your customers by maintaining sufficient quantities of products to meet expected demand. Balance inventory carrying costs with customer service levels, and cut expenses, including write-offs and mark-downs, associated with keeping excess stock on hand.
ERP/MIS support
In one of my earlier posts I mentioned an example, where in an outlet from a chain of retail stores in the US sells a product off its shelf and the half way across the globe, its Chinese suppliers are already packing it; that’s an ERP for you.
It ERP combines all your accounting, purchases, distribution and inventory management aspects of business in to one efficient database driven by a powerful software. Many ERP providers have even developed its character from an ERP into a supply chain management tool, which means that once a product is marked sold at a POS point, it automatically updates the sales figure, the inventory is affected by the same units, suppliers notified at the warehouse and even a purchase order is generated to be sent to the suppliers at source.
If you have a product, a mobile phone, a Nokia E5 and another product, another Nokia E90. The ERP should be able to tell you at what rack, in which warehouse is it lying and at what time (not just the date) did it arrive in the specific warehouse and of all the outlets which outlet has it been assigned to. Your ERP should also be able to tell you that if there are requests from other outlets for the same product and in case those have exhausted their inventory can this be sent to them if there is no demand for the products at the outlet they were originally marked for.
Inventory Analysis
The proper tool to analyze the inventory is the Inventory Turnover Ratio. The inventory turnover ratio is one of the most important financial ratios. The inventory turnover ratio measures the efficiency of the business in managing and selling its inventory. This ratio gauges the liquidity of the firm's inventory. It also helps the business owner determine how they can increase their sales through inventory control.
In order to calculate the ratio, you take net sales off the company's income statement and inventory off the balance sheet and dividing the net sales for the period over its average inventory:
Net Sales/Inventory = number of times the inventory moves
What does it mean?
A high inventory ratio means that the company is efficiently selling its inventory. The higher the resultant number off the ratio above faster the company is in selling its inventory and fewer funds the company has tied up.
Companies have to be careful thought that if they have a high inventory turnover as a high turnover and a high lead time can subject them to a stock-out.
Where companies have a low inventory turnover ratio, then there is a likelihood that they are holding obsolete inventory which is difficult to sell. This may eat in to a company's profit. However, the company may be holding a lot of inventory for legitimate reasons. They may be preparing for a holiday season in the case of the retail industry or preparing for a seasonal cycle, among other reasons.
It is important for a business owner to understand why the inventory turnover ratio is high or low. In order to do that, the owner needs to look at the company's inventory and determine what inventory is being most productive.
It is also important to use comparative data such as time series (trend) or industry data with which to compare a company's inventory ratio in order to analyze whether it is too high or too low.
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